• 3Q23 revenue growth of 8.7% YoY was in line with our FY23e expectations. No detailed financial data was provided. Order wins of S$2.2bn were lower than the average of S$4.6bn-4.8bn, which could be due to the timing of the tender closure. The orderbook stood at a high S$27.5bn (Jun 2023: S$27.7bn).
• Commercial aerospace led the growth, despite no booking of aircraft sale. Recovery in aviation volume and tight hangar capacity underpin demand and rates. However, manpower remains a constraint.
• Management lowered its guidance for the Urban Solutions and Satcom division (USS). It expects a bigger severance provision for Satcom of S$7mn for FY23e (1H23: S$2mn), resulting in YoY EBIT decline at USS.
• We maintain our earnings forecast and BUY recommendation, and TP of S$4.50.

The Positive

• Commercial aerospace led 3Q revenue growth, underpinned by aviation recovery amidst tight hangar capacity. As the largest MRO operator globally, STE benefitted from the airlines’ restoration of capacity which fuelled demand for the airframe, engine and components repairs and checks. Pratt & Whitney’s problem with the GTF engines could also lead to shifts in demand for CFM’s engines, for which STE has built a niche. 4Q23e revenue could be stronger with revenue from the aircraft sale.

The Negative

• Restructuring at Satcom is expected to incur severance costs of S$7mn (1H23: S$2mn). The challenges at Satcom are expected to lead to a lower FY23e EBIT for the USS division.

Outlook

Heightened geopolitical tensions will drive an increase in spending and stockpiling of defence and cybersecurity products and services, thus driving STE’s order wins going forward. Maintain BUY and TP of S$4.50.